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Financial Strategies

A look at what causes market volatility and how to deal with it

Posted
Wednesday, February 14, 2018 9:26 am

Column by Patricia Kummer

The shortest month of the year has brought the most negative volatility we have seen on Wall Street since 2012*, as of this writing. Usually, once we get past January, based on the old adage, “as January goes, so goes the year,” many investors breathe a sigh of relief. But not so fast. Maybe all of those voices of caution you have been hearing for over a year are starting to make sense.

This may be a good opportunity to remind our readers of what causes volatility and how to best navigate it going forward. Investors’ reaction to the first market pullback since the Brexit vote in June 2016 has been widespread. We have heard everything from, “Isn’t it about time?” to “Are we headed into recession?” The answer to both, in my opinion, is no. Markets don’t correct because of the calendar, and we are in the middle of a slow growth cycle, nowhere near the end of expansion.

Let’s tackle the first one regarding the length of time we have been in recovery with virtually no volatility. When you look at the fundamentals of how stocks are priced it is clear to me that the upward trend is a response to double-digit corporate earnings and the potential for worldwide economic growth. Even though this recovery has been the longest on record, time in recovery is not a predictor of when it will end.

The U.S. recovery has been slow due to the impact of global economies climbing back to good health. When our recession ended in 2009, Europe was still two years away from dealing with possible defaults on debt in Greece and almost seven years away from the potential demise of the Eurozone. It would be mid-2017 before the elections in Europe after the Brexit indicated other countries were not going to vote in favor of leaving the European Union and follow the lead from the UK. Then the effects of the work of the European Central Bank (ECB) could take hold and create enough liquidity to stabilize the Union.

Meanwhile the United States is tightening the money supply through rising interest rates. This caused a reaction from China in early 2016 when they devalued their currency, the yuan, throwing our markets into a brief downturn. Since then we have been enjoying nice upward trends with the rest of the world following suit. So that is a short primer on why the recovery is taking so long.

Now, how does that help us determine when we would head into recession again? It is important to understand where we are in the economic expansion cycle before we can determine how fast this cycle will come to an end.

According to Fritz Meyer, economist, “Bull markets end when the yield curve inverts. That’s not happened, and it may not happen anytime soon. The economy is strong. But key fundamentals are changing.” He goes on to state that this change brings opportunity.

According to William Greiner, CFA and chief investment strategist with Mariner Wealth Advisors, the market drawdown is being driven by three main fears: rising inflation; higher interest rates; and fear that the Fed may make a mistake. Any one of these could cause continued market volatility and we are currently facing all three.

Consumers have been spoiled by low inflation and investors have come to expect continued increases in their investment accounts. Both of these conditions are showing signs of aging. It is important to align yourself with a good strategy for navigating the changes in taxes, economic expansion, the rise of inflation and interest rates. The right kind of diversification is extremely important in this environment. You deserve to have a guide to help you traverse these changes rather than piecing together information from the media. They don’t know you. Find someone who is willing to learn about your fears and goals and help you make good decisions.

* Bloomberg

Patricia Kummer has been certified financial planner for 31 years and is president of Kummer Financial Strategies LLC, a Registered Investment Advisor in Highlands Ranch. Registration as an investment advisor does not imply a certain level of skill or training. Please visit www.kummerfinancial.com for more information. Any material discussed is meant for informational purposes only and not a substitute for individual advice.